Citizens turn out for bond hearing

Published 12:00 am Wednesday, February 20, 2008


Voters had the opportunity to ask questions of city officials and investment bankers one final time before casting ballots next Tuesday on the proposed $12.3 million bond issue.

The meeting was held in the Carl Morgan Convention Center. About 50 people attended to hear investment bankers tell them that they were unsure what the bond market would be if the measure should pass.

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Robert Young Jr. of Frazer Lanier Company

of Montgomery talked about the recent ripple through the municipal bond world caused by subprime mortgages.

Here’s how bonds generally work: Municipal bonds are issued by governments to finance projects, such as those listed on the bond issue ballot. People buy bonds as investments, just like stocks. When investors buy bonds, they’re lending money to the entity selling them. The entity selling them pays interest over a period of time to the investor.

Insurance improves the attractiveness of bonds by improving their ratings. This allows governments to borrow at lower interest rates without coverage. Many bond insurers, however, saw their ratings drop because they suffered financial losses related to backing billions of dollars worth of mortgage-backed securities that dropped in value.

If the bond issue passes, Selma will have to contend with the market.

“It will have and is having varying effects, depending on the structure a city or county is using,” Young explained to the crowd.

The number of bond insurers for Selma’s issue, should it passed, has been reduced from six to two that aren’t affected by the mortgage issue, Young said. Ideally the city would rather have more than fewer insurers because it will make the underlying rating of the city more important that it has been in the past.

The problem is changing on a daily basis, but it has had a chilling effect on the bond market, Young added.

If the bond issue passes, Selma cannot sell them for more than 7 percent because the ballot locks in the interest rate at 7 percent. Recently, the harbor authorities in New York and New Jersey saw interest rates for their bond issues shoot up from 4 percent to 20 percent.

If the bonds do not sell right away, provided voters approve the bond issue, the city will not have to begin repaying the debt because there will be no debt, not even for the investment bankers and attorneys, said Robert Thomas, vice president of public finance for Sterne Agee of Birmingham. Thomas’ company structures the deal and sells the bonds.

If the interest rates of the bonds come in at more than 7 percent, “the city is under no obligation,” he said. Even if they could be sold, the bond fund, which is set aside to retire the debt, could cover it.

“We’d pull it off the table and wait until the market improved. The city has no obligation,” he said.

As time passes, the amount of the bond decreases by the amount of money the city would have had to pay back if the issue could have been sold, explained Young.

And if the bond issue isn’t sold?

“Then we’d probably just complain about the condition of the city,” said Mayor James Perkins Jr.